(FORTUNE Magazine) – What a sentimental guy Michael Carlow seemed to be, going to Pittsburgh to rescue a candy bar. The Clark bar -- think of chocolate over flaky peanut butter -- is a small part of childhood for a lot of Americans and a significant part of the adulthood of the people of Pittsburgh, where for the past 109 years the candy has been made. But D.L. Clark Co. was in trouble in 1991, so Carlow offered to save it. Love of the city moved him, as well as compassion for the workers whose jobs were in danger. And, of course, he saw an opportunity for legitimate profit. Or so he said.

That tiny treasure of a candy bar was a little wedge that Carlow used to open his way into the city -- and what a surprise the city was in for, as the story has unfolded in recent months. Michael Carlow, 44, is a sort of serial swindler, it appears, who from Buffalo to Tacoma and places in between has seduced bankers and business executives, coal miners and county commissioners, lawyers and journalists as easily as if they were dewy-eyed innocents who wanted desperately to believe in princes.

With the help of his dad, Carlow bought beloved, troubled manufacturing companies with promises to keep the machines humming. But a trail of court actions and lawsuits suggests that he and his father, Frank Carlow, 74, cheated suppliers , workers, and taxpayers, among others. And they apparently used those acquisitions as multiple platforms to write checks in one of the richest and boldest kiting schemes ever uncovered.

Just how much money is missing could take months or years to calculate. The Carlows' biggest caper seems to have been what might be called the Great Pittsburgh Con, of which Clark was a part. So was Iron City beer, a favorite quaff of steelmakers, or those who like to think of themselves as steelmakers. The city's mighty PNC bank (Warren Buffett owns 8.3% of the holding company, PNC Bank Corp.) accuses the Carlows of making the bank a victim of a huge kiting scheme. Compared with the typical kite of a few hundred thousand dollars, this one was more like a space station. The Carlows, says PNC, siphoned a staggering $31.3 million out of the bank before they were caught.

The kite and the Carlows might still be flying high but for an ironic twist that snipped the string and brought everything crashing to earth. In a sequence that sounds as though it had been written for a screwball comedy, the Carlows overdrew their accounts so often and in such huge amounts that the bank charged them a whopping $500,000 in overdraft fees. The Carlows apparently paid the overdraft fees with more bad checks, which the bank blithely booked as revenue. Someone may have even received a bonus based on that imaginary revenue. In late January, PNC management finally understood the deception. "We have been the victims of a major fraud," PNC Chairman Thomas H. O'Brien announced on February 6. The bank has opened its books to the U.S. Attorney's office as well as the FBI and other federal investigators. The feds confirm that there is an investigation going on, but won't discuss it.

How the Carlows managed to run their alleged scams as long as they did is a sobering tale of the perils of self-delusion, phantom reputations, carelessness, naivete, and a stubborn belief in the unbelievable. The story reveals the American business spirit at its most admirable: a willingness to help a spunky outsider who has the guts and passion to attempt rescues that make insiders tremble. And it also displays the business spirit at its less noble. Prior to PNC, some victims who discovered the Carlows' alleged swindles were inclined to cut a deal with them: pay us back, and we won't seek to have you prosecuted. The victims didn't seem much concerned about how the Carlows would make restitution. Would the Carlows wash cars on weekends? Win the lottery? Move their scams to another town, perhaps? PNC, to its great credit, demonstrated scrupulous ethics by turning the Carlows in and finishing their game.

The Carlow story began in Uniontown, Pennsylvania, a dreary and busted place in played-out coal country 50 miles south of Pittsburgh. The area was settled by Scotch-Irish and German farmers in the 18th century; from the late 19th century on, successive waves of Hungarians and Italians came to earn a hard but good wage deep in the mines. As automation displaced jobs and speeded depletion of the mines, the region sank into an economic mire. The population has dropped from 200,000 to 140,000 over the past 40 years, while poverty, unemployment, and crime rates have risen to among the highest in the state.

Despite a handful of cheerful shops and busy enterprises, Uniontown looks close to abandonment. Broken-looking men and women amble along Main Street past a personal finance agency, a department store occupied by ghostly mannequins but few customers, and the Fantasy Travel Agency. Fantasy's headline tour is a $138 bus trip to Atlantic City to play the slots, an offering that sums it up. Uniontown dreams small.

Clearly, Uniontown is not a place that could contain the Carlows' ambitions. Frank Carlow's early biography is sketchy, and lawyers for both men said their clients declined to be interviewed by FORTUNE. "They won't talk while there is an investigation going on," says Michael's attorney, William Manifesto. "But we are confident that they will be exonerated." After service with the U.S. Army during World War II and a couple of years in engineering school at the University of West Virginia, Frank returned home to Uniontown. The Carlows are of Italian descent, and in those days Italians were not admitted to the Uniontown Country Club or into such gentrified commerce as banking.

Frank, who has a stocky build and steel-gray hair, and is not especially social by nature, lived at the fringe of the business community. He opened an electrical appliance store, which went out of business. Starting over, he created in 1953 the Standard Machine & Equipment Co., which was to become the holding company for many Carlow enterprises. Standard Machine's original business was demolishing failed factories and selling off the machinery and other reusable parts.

Even when he became rich, Frank chose to remain an outsider while still living in Uniontown. Robert E. Eberly, a major shareholder in a large local bank, Integra, says that Frank generally declines to contribute to charities. A few years ago, however, Eberly persuaded him to donate a job, the destruction of an old building on Main Street to make way for apartments for the elderly. When the work was finished, Frank was uncharacteristically expansive. "I'll tear down any building in town, free of charge," he told Eberly. Demolition was the core competence of the Carlow business empire. But it was under Frank's son, Michael, that the potential for taking things apart was fully realized. Frank's wife, Marie, is a simple and devout woman by all accounts. (Her name, nonetheless, is on a trust that creditors believe shelters millions of dollars.) One of the Carlow's three daughters became a nun. Michael, the only son, attended mass almost daily into his teens, a former classmate remembers. But football was Michael's passion. Like a lot of kids, Michael wanted to follow the trail out of western Pennsylvania blazed by Joe Namath, the most glamorous quarterback of the 1960s. Michael never came close, but he did make it as far as quarterback of Uniontown High, and led the team to a winning season. "He had a good arm," says John Fortugna, who played behind him as fullback and is now Uniontown's head football coach. "But he wasn't quick footed." Not at that stage of his career.

What distinguished Michael was his feistiness, his grit, his determination. Don Roddy, a high school buddy and now owner of the Caddyshack, an amiably boisterous Uniontown tavern, recalls the young Michael. "He practiced for hours by rifling a football into an old rubber tire," says Roddy. "As an athlete he was not much better than average. But he was an overachiever, always trying to be what he didn't have the talent to be."

After high school, Michael left Uniontown and returned only occasionally, mostly to strut. He went to Dean Junior College in Massachusetts, where he played a little more football. "We had to watch the films when he came home on vacation," recalls Roddy. Michael then transferred to Boston College, where he forgot about football and worked hard to overcome the dyslexia that had made him a poor student. In 1975 he earned a degree in accounting and went into business with his father. Frank continued to live in Uniontown, but the son moved on.

Within a few years the younger Carlow became the leading partner in Standard Machine, or at least the more visible one. Over the next 20 years the Carlows bought up troubled coal mines and cement companies, failing candy factories and furniture makers, an endangered glassmaker and a brewery. It was Michael who led the way into town after town and explained the takeover to the locals. Although Frank may have been as important to the team, he let Michael have the stage and stayed so far in the background that it's hard to find a photograph of him. The Carlow empire became a bewildering bundle of unrelated, mostly crippled enterprises, more than 40 of them at one time or another in Pennsylvania, Ohio, West Virginia, New York, Connecticut, Alaska, and Washington state. Michael promoted himself as a "turnaround artist" and created a phantom reputation that was rarely challenged and often promoted in the local newspapers. But it seems that the Carlows generally turned companies upside down to shake what they could out of them. For example, in 1984 they gained control of B.C. Industries, a concrete maker in Tiltonsville, Ohio, that was under financial stress. In May a federal jury concluded that they had misappropriated B.C.'s assets and defrauded its creditors. The court ordered the Carlows to pay the victims $5.7 million.

The Carlows generally financed a new acquisition by putting a few dollars down and promising to pay over time. Then they ignored the bills -- for taxes, insurance, supplies, whatever. "Michael told me once that he doesn't pay unless he's forced to," says Louis Dudek, an official of an electrical workers' union that represented employees at a company owned by the Carlows. "I guess that's his coat of arms." After an Ohio appellate court upheld a verdict against the Carlows for strip-mining and blasting in a residential neighborhood near Canton, lawyers for the plaintiffs pursued 17 Carlow companies in half a dozen lawsuits around the country before collecting. A court in Fayette County, Pennsylvania, ruled in April 1992 that the Carlows owed FMC Corp. $330,000 for cranes they had bought in the 1970s; the company is still chasing them for the money. FMC has lots of company. In the Fayette County court alone, 55 creditors are seeking millions in unpaid bills.

What were the Carlows after? Clearly they wanted to be rich, and that they achieved. Frank was able to build an $800,000 house in Uniontown a few blocks from the Eberlys'- and more expensive. He also has a condominium in Key Biscayne, Florida. Michael has an eight-bedroom house in Upper St. Clair, a Pittsburgh suburb, where his four children sometimes visit (he's divorced); a ski lodge near Vail, Colorado; and a home in Boston. But Michael seemed to yearn for more. "What I remember about Michael is his passion for acquiring companies and his persistence at it," says Ty Ballou, who once ran D.L. Clark for the Carlows. An acquaintance of Michael's, Jacque Joseph, a former aide to one of the state's Congressmen, says, "My impression was that Michael wanted to be Donald Trump...the Donald of Pennsylvania."

The Carlows had uncanny instinct for applied sociology. They would often prey on geriatric companies with glorious pasts and grim futures. Professionals in the industry -- coal, candy, or whatever -- often had little or no interest in buying such moribund companies. Still, boosters were eager to keep them alive, partly for sentimental reasons but largely because they provided good-paying manufacturing jobs. There's not a newspaper or civic group in the country that is not primed to appreciate how precious and vulnerable those jobs are. State and county agencies are under great political pressure to put up development money for companies that provide blue-collar work.

So Michael Carlow would drop out of the sky in a corporate jet and promise to save the endangered enterprise. Imaginative and resourceful, Michael found hidden opportunities -- for the Carlows -- in crumbling companies. Take the case of Kittinger Co., a furniture maker in Buffalo. Since 1865, Kittinger had been making elegant desks, chairs, and other pieces, a few of which are in the White House. But competitors in cheaper labor markets have squeezed Kittinger hard in recent years. The privately owned company changed hands a few times in the 1980s as earnings shrank and employment dropped from 250 to about 150. In 1990, Carlow bought Kittinger for an undisclosed price.

Among Kittinger's assets were $9 million worth of legs, backs, and other parts with which to make reproductions of 18th-century furniture from the collection of the Colonial Williamsburg Foundation. The trouble was that Kittinger no longer had the license to produce the reproductions. The foundation had passed it to someone else. Carlow made and sold the furniture anyhow, changing the design a little to try to escape copyright protection. The foundation has won a $575,000 judgment against Kittinger.

By not paying fringe benefits to which workers were entitled, Carlow saved a lot of money. He always gave employees their hourly wages, for the practical reason that they would have quit on the spot if he hadn't. But apparently he often cheated on accounts they weren't likely to tap for a while. In the case of Kittinger's factory hands, union officials claim he didn't send payments to the state for workers' compensation, or FICA taxes to the U.S. Treasury. (The workers are out of jobs now, but as long as they can prove they were employed at Kittinger, they can collect their Social Security benefits.) Pennsylvania coal miners who worked for the Carlows discovered after doctors and hospitals dunned them that their health plan wasn't funded. Their union estimates the unpaid medical bills amount to more than $1.6 million.

Finally, the Carlows appear to have used Kittinger and dozens of other companies as a network for what may have been their most profitable business -- huge and elaborate check-kiting scams. A kite exploits the float in the banking system, the day or so lag between the time you deposit a check in your bank and the time the check clears the bank it was written on. A very primitive kite might work something like this: Three con men open accounts of, say, $50,000 in three banks, with real money but in the names of dummy companies. Con man A writes B a check for $100,000. B's bank lets him draw on those funds before the check has cleared, so B pockets $50,000 and writes a check to C for $50,000. C then sends A a check for $50,000; A gives B $50,000, and on and on in a variation of musical chairs. If the swindlers write fast enough and get their timing right, they can keep the cycle going for a while before the banks realize that one of them is short $50,000.

Kiting accounts for a significant share of the $800 million or so banks figure they lose each year to bad checks. So banks have computer software that detects suspicious patterns even when kites are elaborately camouflaged. One simple rule of thumb still works pretty well: Ninety percent of worthless checks are numbered lower than 200. A swindler opens a new account, makes a score, and skips town.

Michael Carlow's genius, his accusers say, was that he used real companies, not dummies, and he stayed in town long enough for bankers to feel comfortable. How many kites the Carlows flew may never be known. Banks are supposed to report all frauds of more than a few thousand dollars to the local U.S. attorney's office. In practice, the feds are so overloaded with investigating drugs, violent crime, and now terrorism that simple bank fraud has to run into the hundreds of thousands before they pay attention (see box). Banks, moreover, are not eager to advertise that they have been taken, even when the money runs into the millions. Some would rather settle with the thieves.

The Puget Sound Bank in Tacoma suspected in 1988 that the Carlows had swindled the bank for $5.7 million. "It was a typical kite situation," says Bill Philip, the bank's former chief executive, while declining to go into further detail. The bank agreed not to ask for prosecution if the Carlows would repay them. Does Puget Sound have any regrets about not insisting on prosecution in light of the Carlows' subsequent business dealings? Philip pauses before answering. "The money was very important to us, as you can understand," he says. "We were a small bank. Our total earnings at the time were only $15 million to $20 million a year."

Don Vandenheuvel, Puget Sound's former chief financial officer, defends the way the bank and its attorneys cut a deal with Carlow and thus protected its shareholders. "When you discover a kite, it is important to be the first one to discover it," says Vandenheuvel. "Because the bank that does gets all the money, and the others don't get anything."

So when Michael Carlow arrived in Pittsburgh in 1991 there were no criminal charges besmirching his reputation, although anyone who did a little checking could have found a heap of civil actions. Carlow's first acquisition was Clark, the candymaker -- and a classic Carlow target. The company was in trouble. The Clark bar commanded some shelf space as far away as New York and Chicago. But Clark didn't produce the candy in the volumes comparable with those of national brands like Nestle's Butterfinger, so Clark didn't have much clout with suppliers and distributors. Moreover, Clark's labor costs, $17.50 or so an hour on average, were higher than those of competitors who made at least some of their candy in cheaper labor markets.

Still, the folks of Pittsburgh didn't want to lose a connection to the past. Their great-grandfathers had snacked on those bars in the steel mills; Clark's big blue and red neon sign was a familiar landmark along the Allegheny River. And if Clark sank, about 100 manufacturing jobs would go under as well. So Carlow bravely offered to save the company. "He was impatient, insisting that things had to be done in a hurry," says Frank Brooks Robinson, president of Regional Industrial Development Corp., which leased Carlow the plant in which to make the candy. "He projected a sense of crisis, and that created a sense of urgency in us." Carlow gave the impression that unless the locals accommodated him in a hurry, he would walk.

Leaf North America, the Illinois company that sold Clark to Carlow, had few illusions about either the property or the buyer. The company knew of the Carlows' reputation for being slow payers. "Before Michael came to us, he had some strange business dealings," says James Hanlon, former president of Leaf. But Carlow offered Leaf the best deal it could get. The purchase price was not disclosed; Clark's assets currently are valued at about $3 million. Carlow put a little money down, and Leaf insisted that he pay the installments not quarterly or monthly, but weekly, $50,000 a week, the sort of relationship a boarding house establishes with a tenant who looks as though he might leave in the night. "The payments were extracted with great difficulty," says Hanlon. "He had 100 different excuses about why the checks were late, all different."

Pittsburgh, however, took Carlow at his word -- that he was a turnaround artist who could take over a business he knew nothing about and make it work. "This is a trusting city, more Midwestern than Eastern," says Richard P. Simmons, chairman of Allegheny Ludlum, the specialty-steel manufacturer. A stranger doesn't need a pass for an elevator ride up a Pittsburgh skyscraper. Ask people in Pittsburgh why they trusted Michael Carlow, and many will answer that he was a "well-known businessman." Well known in Pittsburgh? No, in Uniontown. But to the folks in Uniontown, Carlow was a remote figure who had left town long ago.

Through the early 1990s the Carlows' Pittsburgh domain expanded rapidly. They bought a local brewery, the 134-year-old Pittsburgh Brewing, maker of Iron City beer, which, although a sentimental favorite in the city, was losing market share regionally.ÊProduction peaked at 850,000 barrels a year in 1985 and had dropped to 670,000 in 1992, the year the Carlows bought it. PNC Bank loaned the Carlows $10 million in operating capital for the brewery, after they offered certificates of deposit as well as stock of Pittsburgh Brewing, Clark Candy, and another Carlow company as collateral. PNC's enthusiasm was understandable. If Michael Carlow was for real, he was just the kind of customer the bank wanted. The economies of western Pennsylvania and eastern Ohio, PNC's heartland, have not been robust. The Pittsburgh area alone lost 160,000 manufacturing jobs in the last decade. So entrepreneurs willing to bring their own money into the city, as Carlow seemed to be, and willing to borrow more were highly prized. PNC, coincidentally, was about to go through a painful experience with alternative ways of making profits. As demand for loans fell, PNC tried to boost earnings by loading up on derivatives-"swaps"-that would pay off with a decline in interest rates. Rates rose, of course, and PNC's earnings fell from $726 million in 1993 to $610 million in 1994. Candy and beer ventures were risky, but at least they stood some chance of success. More puzzling was the Carlows' attempt to revive a wholesale bakery that had failed twice before, a hopeless mission in the eyes of many Pittsburgh citizens. "If it doesn't make sense, it doesn't make sense," says Simmons, who followed, with moderate curiosity, newspaper accounts of Michael's rise. "But I've made some dumb investments in my time, and I figured that if this guy puts his money into it, he must believe in it." Neglected in the news accounts was that the cash Carlow put into his ventures was money he owed other people.

Anyhow, it would have been gratuitous for Simmons or other members of the Duquesne Club, the grand and ancient watering hole of the corporate establishment on Sixth Avenue, to raise questions about the newcomer. (Carlow is not a member.) What were the grandees trying to do? Break the spirits of working men and women dependent on Carlow for jobs? Carlow, moreover, might have been able to make even a twice-abandoned bakery a success. "Sometimes an outsider can see value where an insider can't," observes Simmons.

Carlow's reckless acquisitions made sense for reasons that had little to do with conventional ideas about return on investment. He bought himself celebrity and good will. To Pittsburgh he was a savior who was scraping the rust off the city's old factories and making them run again. Pittsburgh magazine made a flattering profile of Carlow its June 1993 cover story. Like others who met him, the writer was captivated by Carlow's energy, his daring, his desire to save the city. The article extolled Carlow as a "post-modern mogul" and a "messianic hero."

Questions about his character were brushed aside. Carlow suggested to the writer that some people distrusted him because of his Italian ancestry. "I was brought up by my mother and father never to quit, to keep working, to be honest and creative," Carlow said. "Bigotry, in all its forms, never fails to amaze and surprise me. It's a terrible thing." So the reader was left with the strong impression that Carlow's detractors were nothing but bigots. The more famous the "messianic hero" became, the more difficult it was to doubt him.

High in the Frick Building, a stately granite tower that rubs parapets with Mellon Bank and USX and other Pittsburgh pillars, Carlow rented a $13,000-a-month suite for the offices of Pittsburgh Food & Beverage, the holding company for Clark, another candy company, Pittsburgh Brewing, and a manufacturer of decorative glass (the bakery flopped in 1994). Persian rugs on the floor, pastoral landscapes on the walls, and -- the nicest touch of all -- a mahogany reproduction of one of George Washington's writing desks gave the reception room a reassuring look of stability and hushed elegance.

But in the rooms beyond that quiet antechamber, apparently, a massive kiting machine was grinding away furiously. The Carlows opened close to 30 accounts under the names of the Pittsburgh Food & Beverage companies as well as other Carlow properties, including a couple of cement makers and Kittinger furniture of Buffalo. It isn't clear whether anyone at the bank was aware that all belonged to the Carlows.

PNC maintains in a civil action filed in U.S. District Court for Western Pennsylvania that Michael and Frank Carlow and a longtime business associate, Larry Ousky, dashed off thousands of checks from late 1993 to January 1995. The dimensions of the scam were truly impressive. "Daily deposits of millions of dollars of checks were required to maintain the scheme and continue the fraud, and checks in constantly increasing amounts (mostly signed by Michael Carlow personally) were deposited on each and every business day," PNC maintains. The float the Carlows created was immense- half a billion dollars' worth of unsettled checks circulating at the same time through various accounts. To appreciate their boldness, consider that the legitimate revenues of the four PF&B operating companies were a mere $76 million in 1994. Most of that half a billion stayed within PNC. To take a hypothetical example: If Pittsburgh Brewing sent a check to Clark on Tuesday to cover a shortage and Clark sent Pittsburgh Brewing a check in the same amount on Friday, nothing happened.

But $31.3 million did leave the bank. A lot of it went to keep former creditors at bay, including about $1.2 million to repay part of a Small Business Administration-backed loan the Carlows had defaulted on in 1982, $746,000 to American Express for travel and entertainment expenses, $463,000 for leasing an airplane, and on and on. About 350 checks, for a total of $10.5 million, were made out to Ousky. According to PNC's complaint, "these checks appear to have been . part of a related check-kiting scheme involving two banks in Ohio." Ousky's lawyer says his client hasn't seen the complaint and can't comment.

Keeping track of thousands of checks that have to cover one another and hiding the extraordinary shuffle is a complicated task and is in some respects a tribute to the Carlows' intellectual and managerial skills. The bank unwittingly made it easier for them, however. Each morning at the start of business the Carlows could turn on a desktop computer and call up the balances on their PNC cash disbursement accounts. They had until the end of the day to deposit a whirlwind of checks that would bring the accounts into balance and make everything seem okay until the following morning. The Carlows happily paid overdraft fees with another flurry of worthless checks.

What PNC will not talk about is how the scam went undetected for as long as it did. The avalanche of overdrafts in the Carlow accounts generated $500,000 or so in fee revenue, or what looked like revenue. Again, that would have been a stupendous expense, if real, for the Carlow companies. According to PNC, the bank's control systems, including those that are supposed to discover kites, were working properly. But it wasn't until January 1995, more than a year after the accounts were opened, that PNC executives became suspicious (for reasons they won't talk about), examined parts of the 1994 results very carefully-and were horrified.

Bank executives and lawyers confronted Michael Carlow in the first week of February. "Carlow admitted that he was 'totally wrong' and PNC was owed 'a lot of money,' " PNC maintains in its suit. But despite his confession, Carlow was as self-confident as ever, according to one account. He had been through this before. "Carlow sat down with the bankers and said, 'I'll write you a check,' " says one familiar with the showdown. "He offered them $3 million a year for ten years and gave them a list of a dozen organizations he was paying off in this way." The bankers were stunned at first, caught off guard by Carlow's parry. But by the next day they had recovered and knew what they had to do. "PNC said, 'No, the buck stops here,' " the source reports. The bankers showed Carlow a complaint they were prepared to file in federal court to put Pittsburgh Food & Beverage in receivership. To avoid that humiliation, Carlow quit as PF&B chairman. The bank then called the U.S. attorney's office.

In the aftermath one bank employee has been dismissed. The bank declines to discuss the matter. "But there's plenty more blame to go around," says a colleague. Kittinger furniture has closed. Clark shut down as well for a time, but has a new owner who is ready to start making candy again. Pittsburgh Brewing kept making beer all through the crisis, but production has dropped further, to 470,000 barrels per year. PNC and the other creditors are eager to sell the company. Various other Carlow enterprises are either out of business or operating in a state of elevated anxiety.

As for the Carlows, they're spending most of their time talking to lawyers these days. "Michael was Icarus, flying too close to the sun," says William Brandt, the trustee the bank hired to run PF&B after it persuaded Carlow to quit. But lest that mythic allusion romanticize Carlow, Brandt adds: "The difference between Carlow and a holdup artist with a gun is that a holdup artist could never hope to get away with so much money."

There are two kinds of con artist. One type ensnares victims by greed, the hope of making money in a deal despite improbable economics or questionable ethics. The victims at least come away wiser. The more vicious con artist traps his victims through their generosity, the belief that a guy from Nowheresville should be given a chance. The suckers come away more cynical, less willing to give the next gent without a pedigree a shot. Michael Carlow, it appears, was that kind of con man.